SDX Energy Announces Results for the Three & Six Months Ended 30 June 2021

Source: www.oilegypt.com 8/20/2021, Location: Africa

SDX Energy Plc (SDX), the MENA-focused oil and gas company, is pleased to announce its unaudited financial and operating results for the three and six months ended 30 June 2021. All monetary values are expressed in United States dollars net to the Company unless otherwise stated.

Mark Reid, CEO of SDX, commented:

"I am very pleased to report first half 2021 results that show strong growth in revenue, netback, EBITDAX and operating cash flows versus the same period in 2020, as well as ending the period with a strong liquidity position. The producing assets in Egypt and Morocco are performing well and we remain above our mid-point guidance for the year. Our drilling activities have yielded three successful wells in Morocco, all of which are now onstream and contributing to cash flow, and one at South Disouq, which is due to start up shortly. As previously announced, whilst the result of the Hanut-1X well is disappointing, I remain positive about the remaining prospectivity in the area which has not been materially impacted."

Three and six months to 30 June 2021 Operations Highlights

- H1 2021 entitlement production of 5,931 boe/d was 3% higher than 2021 mid point market guidance of 5,770 boe/d and 4% lower than H1 2020 mainly due to natural decline, well workovers and expected sand and water production in two of the five wells at South Disouq.

- Capex guidance for Morocco for the 12 months ended 31 December 2021 has been increased by US$1.5 million as wells planned for the second phase of 2021 drilling are deeper than those included in the original guidance. Capex of US$15.8 million was within guidance for South Disouq and West Gharib. This results in group 2021 capex guidance being revised to US$26.5 - 28.0 million (previous guidance US$25.0 - 26.5 million).

- The Company's operated assets recorded a carbon intensity of 2.7kg CO2e/boe in H1 2021 which is one of the lowest rates in the industry. Scope 1 greenhouse gas emissions at operated assets were 4,405 tons of CO2e. Scope 3 greenhouse gas emissions in Morocco were 75,500 tons of CO2e, which is approximately 38,500 tons of CO2e less than using alternative heavy fuel oil.

- In South Disouq, the IY-2X step-out development well, the first of a two-well campaign, was spud in late June 2021. The well was drilled to a measured depth of 8,025 feet, encountering 40.5 feet net-pay of high-quality gas-bearing sands, with an average porosity of 23.4%, near the base of the Kafr El Sheikh ("KES") formation. The top of the KES sand was encountered at a measured depth of 6,768 feet. Following well te sting, the well is expected to be brought on production during the last week in August with a view to maximising recovery from the Ibn Yunus Field and helping to maintain current gross production levels of c.45MMscfe/d at the South Disouq Central Processing Facility (the "CPF").

- Post-period end, the second well, the Hanut-1X ("HA-1X") exploration well, spudded on 4 August and reached the target depth of 6,000ft on 17 August. The primary target for HA-1X was the Basal Kafr El Sheikh sand at approximately 5,200ft. The well however found that the Basal Kafr El Sheikh sand had been eroded at this location. Whilst drilling to target depth, good quality sands were found at the Qawasim level, however they were not charged with gas. SDX considers the result of the HA-1X well to have limited impact on the remaining c.90-100bcf of prospectivity in the SDX acreage at South Disouq.

- Following the IY-2X and HA-1X well results, during H2 2021 the Company will evaluate the current and future prospectivity of the South Disouq concession to assess whether there is evidence that the carrying value of the asset should be impaired.

- In West Gharib, following the ten-year concession extension granted earlier in 2021, preparations continued for a campaign of three to four development wells, the first of which is expected to spud in early Q4.

- The first phase of the Morocco drilling campaign, which consisted of three appraisal/development wells in SDX's operated Gharb Basin acreage in Morocco (SDX: 75% working interest), was successfully completed in June 2021.

- The OYF-3, KSR-17 and KSR-18 wells were all commercial successes, with OYF-3 and KSR-17 already connected as at 30 June 2021 and producing into the Company's infrastructure. KSR-18 has been tested and was connected at the end of July 2021. Management estimates that 1.5-1.6bcf of gross resources have been added by these wells, which is in line with pre-drill P50 estimates. Preparations are underway for the drilling of up to two additional wells in Morocco later in the year.

- As previously announced, during the first half of the year, the Company received the COVID-19 delayed laboratory analysis of the cuttings and sidewall cores from the LMS-2 well. This information confirmed that LMS-2 had successfully encountered the targeted thermogenic gas source that exists in the Top Nappe horizon but that the reservoir in the Lalla Mimouna Nord concession has low permeability and the well is unlikely to flow conventionally. As such, the Company will not risk US$0.5 million testing this well, nor will it commit to further investment in the Lalla Mimouna Nord concession post the end of the concession date in July 2021 as a result of the limited likelihood of it being commercially developed. Accordingly, the Company has recognised a US$10.3 million non-cash impairment charge in Q2 ahead of relinquishment of the concession, of which US$2.8 million relates to LMS-2.

Six months to 30 June 2021 Financial Highlights

- Netback of US$22.1 million, 26% higher than the same period in 2020 of US$17.6 million, was primarily driven by strong demand in Morocco, which during H1 2020 was impacted by temporary COVID-19 shutdowns at three customers. West Gharib netback increased due to higher service fee realisations, which outweighed the impact of lower production due to natural decline. These factors were partly offset by a lower netback at South Disouq as a result of lower production due to natural decline and well management activity, including workovers.

- EBITDAX of US$19.9 million was 27% higher than the same period in 2020 of US$15.7 million due to the netback factors described above.

- Depletion, depreciation and amortisation ("DD&A") charge of US$14.9 million was higher than the US$12.0 million for the same period in 2020 due to higher production and lower 2P reserves in Morocco, partly offset by lower production at West Gharib.

- The Company recognised a US$10.3 million non-cash E&E impairment in H1 2021 following the decision to not commit to further investment in the Lalla Mimouna Nord concession in Morocco post the end of the concession date in July 2021. In H1 2020 US$4.5 million was written off following the drilling of two sub-commercial wells, SD-6X in South Disouq and SAH-5 in Morocco.

- Operating cash flow (before capex, excluding discontinued operations) of US$14.9 million, was 43% higher than the same period in 2020, US$10.4 million, primarily due to the netback drivers discussed above.

- Capex of US$15.8 million, reflects:

- US$8.9 million (incl. US$0.5 million decommissioning provisions) on three wells in Morocco;

- US$2.0 million for well workovers in Morocco;

- US$3.7 million for the completion of the SD-12X tie in at South Disouq, well drilling preparations for IY-2X and HA-1X, the SD-4X well workover, and other capex projects at South Disouq;

- US$1.2 million for workovers and development drilling preparations in West Gharib;

- Liquidity: Closing cash as at 30 June 2021 was US$9.1 million. The Company has satisfied the conditions precedent on the five-year EBRD credit facility, which remains undrawn and has US$10.0 million availability.

- Together with cash generated from operations, the Company is fully funded for all planned activities in 2021 - 2022.

COVID-19 update

- The Company has had no COVID-19 business interruptions since Q2 2020 when three customers in Morocco resumed taking gas following a short period of mandatory shutdown. Egyptian production has remained unaffected by COVID-19. The Company continues to follow applicable government guidance in each of its territories.

H1 2021 Performance vs 2021 Guidance

Production

- H1 2021 entitlement production of 5,931 boe/d is 3% higher than midpoint guidance of 5,770 boe/d and 4% lower than H1 2020.

- South Disouq : During the first half of 2021, the existing wells continued to exhibit natural decline and expected sand and water production from two of the five wells, albeit this was partly offset by contribution from the SD-12X well which was brought online in December 2020. The SD-1X and SD-4X wells were successfully worked over during the period and were put back on production at improved gas production rates and with reduced sand and water production. Production for the six months was above midpoint guidance, with production for the remainder of the year expected to remain close to this as the impact of the planned 2-3% Central Processing Facility ("CPF") downtime in H2 should broadly be offset by contribution from the IY-2X well which is expected to be tied in during the last week in August.

- West Gharib: The existing wellstock at the asset continued to produce steadily, albeit exhibiting natural decline as expected. Preparations are advanced for a development drilling campaign of four wells plus one water injector well which will commence in Q4 and allow the Company to benefit from low-risk production growth into a higher commodity price environment. Production will trend towards midpoint guidance until such time as the new wells are drilled and brought online.

- Morocco: H1 2021 saw stronger demand from all customers and this is the reason that the Company is currently exceeding guidance. In addition, H1 2021 reflects additional consumption from an existing customer's second factory which came online in December 2020. Production guidance is 8-12% higher than 2020 production and reflects a sustained return to normal levels of consumption across the customer base, following COVID shutdowns which impacted 2020 production.

- COVID-19: The 2021 production guidance presented assumes no significant production curtailments due to COVID-19. Should there be COVID-19 related disruptions, then production guidance may be revised.

Capex

- Capex for the six months to 30 June 2021 is shown below and is compared to the revised guidance figure of US$26.5-28.0 million (previous guidance US$25.0-26.5 million) which predominantly relates to one exploration and one development well in South Disouq together with workovers and the installation of an inlet compressor. Five new wells and workovers are planned in Morocco and four new wells and facilities upgrades will be undertaken at West Gharib.

- South Disouq : The development well, Ibn Yunus-2X, spud in late June 2021 and reached TD in July 2021 encountering 40.5 ft of net gas sand pay. During the last week in August, the Company expects that the IY-2X well will be tied in via a short flowline to the Ibn Yunus-1X location where an existing flowline connects to the South Disouq CPF. The gross cost of the tie-in was c.US$0.55 million. The Hanut-1X exploration well, which was completed during Q3 2021, did not encounter gas-bearing sands and will be plugged and abandoned. An inlet compressor will be installed at the CPF site to maximise recovery from the fields, and several well workovers are also planned. In H1 2021, US$3.7 million of capex was invested for the compressor project (US$1.5 million), the IY-2X development well (US$0.6 million), the completion of the SD-12X tie in (US$0.4 million), planning for the HA-1X exploration well (US$0.2 million), the workovers of SD-4X and SD-1X (US$0.2 million) and other CPF projects.

- West Gharib: Four infill development wells and one water injection well will be drilled, and additional facilities to support this project will be installed. In H1 2021, US$1.2 million of capex was spent on a number of well workovers and development drilling preparations.

- Morocco: Capex guidance for Morocco for the 12 months ended 31 December 2021 has been increased by US$1.5 million as the wells planned for the second phase of the 2021 campaign in H2 are deeper than those included in the original guidance. In H1 2021, US$10.9 million of capex was spent on three development wells (US$8.9 million which includes US$0.5 million of decommissioning provisions) and a well workover campaign (US$2.0 million). A further two development wells will be drilled in the next campaign in Q3/Q4 2021.

2021 Drilling and Operations Update

Morocco drilling campaign update (SDX 75% working interest)

- The first phase of the Morocco drilling campaign consisted of three appraisal/development wells in SDX's operated Gharb Basin acreage in Morocco (SDX: 75% working interest).

- The first well, OYF-3, which spud on 30 April 2021, reached its TD at 1,183 metres MD on 11 May 2021. The main Guebbas reservoir target was thicker than expected and encountered a 5.2 metre net gas sand. The well also encountered a 1.7 metre net gas sand in a secondary zone that OYF-3 will also produce from.

- The second well, KSR-17, was spud on 13 May 2021 and reached its TD at 1,848 metres MD on 27 May 2021. In the main Hoot reservoir, the well encountered a 5.3 metre net gas sand which was slightly thinner than expected, but with very good reservoir properties.

- Both OYF-3 and KSR-17 have been tested, connected, and producing into our infrastructure before the end of the reporting period. Post-drill P50 reserves are estimated at a combined gross 0.81bcf recoverable which is in line with predrill estimates.

- Finally, the third well of the campaign, KSR-18, was spud on 30 May 2021 and reached its TD of 1,905 metres MD on 14 June 2021. Both prognosed targets were successfully encountered, with the shallower Mid Guebbas target comprising a 3.8 metre net gas sand and the main Hoot target encountering a 13.9 metre net gas sand. As expected, the main Hoot had been slightly depleted by production from a nearby well, however the well is still expected to contribute incremental volumes and deliverability from this extensive compartment. Further to these zones, a third 5.5 metre net gas sand was encountered at the Base Guebbas and will contribute to production in the future when the Hoot has been depleted. Subsequent to the reporting period, KSR-18 has been tested and put on production.

- The second phase of the Moroccan drilling campaign is expected to commence in September/October 2021.

- The above developments will allow the Company to continue to supply gas to our customers in line with our contractual commitments and continue to support lower CO2 emissions at our customers.

South Disouq Egypt exploration drilling campaign update (SDX 55%/100% working interest)

- Following the success of SD-12X and further review of the 3D seismic, management has now identified c.233bcf of mean unrisked recoverable volumes, which are close to our existing infrastructure, located in horizons that are either productive in South Disouq or in adjacent blocks and which have now been high-graded to drill-ready prospects.

- The Company received final Ministerial and Parliamentary approval of the two-year extension to the South Disouq exploration area. The campaign kicked off with the drilling of the IY-2X development well in the Ibn Yunus field to accelerate production and cash flows. The well will be tied in during the last week in August and the Company's expectations are that the IY-2X well can maximise recovery from the Ibn Yunus Field and help maintain current gross production levels of c.45MMscfe/d at the South Disouq Central Processing Facility. The IY-2X well was tied in via a short flowline to the Ibn Yunus-1X location where an existing flowline connects to the South Disouq Central Processing Facility. The gross cost of this tie-in was US$0.55 million.

- Post-period end, the second well, the HA-1X exploration well, spudded on 4 August and reached the target depth of 6,000ft on 17 August. The primary target for HA-1X was the Basal Kafr El Sheikh sand at approximately 5,200ft. The well however found that the Basal Kafr El Sheikh sand had been eroded at this location. Whilst drilling to target depth, good quality sands were found at the Qawasim level, however they were not charged with gas. SDX considers the result of the HA-1X well to have limited impact on the remaining c.90-100bcf of prospectivity in the SDX acreage at South Disouq.

- Management's estimate of the mean prospective resources and chance of success of the prospects identified in the South Disouq area.

- Following the IY-2X and HA-1X well results, during H2 2021 the Company will evaluate the current and future prospectivity of the South Disouq concession to assess whether there is evidence that the carrying value of the asset should be impaired.

West Gharib Egypt development drilling campaign update (SDX 50% working interest)

- In March 2021, SDX obtained approval for a ten-year extension to the West Gharib Production Services Agreement increasing audited working interest 2P reserves in this core oil asset as at 31 December 2020, by 60% year on year, or 119% taking account of 2020 production, to 3.52 million barrels.

- Following this agreement, SDX and its partner commenced planning for a four well development drilling campaign plus one water injector well that is expected to start in Q4 2021, and is part of a wider three-year plan to arrest production decline in the asset and return production levels to c.3,000 bbl/d, taking advantage of low-risk production growth and the improved oil pricing environment.

Six months to 30 June 2021 Financial Update

- Netback was US$22.1 million, 26% higher than the Netback of US$17.6 million for the six months to 30 June 2020, driven by:

- Net revenue increase of US$5.2 million due to:
- US$1.2 million higher revenue at West Gharib as lower production (2021: 516 bbl/d, 2020: 647 bbl/d) was more than offset by higher realised service fees (2021: US$51.10/bbl, 2020: US$30.18/bbl);
- US$4.4 million higher revenue in Morocco due to increased production following strong demand rebound following COVID-19 shutdowns in early 2020 and an additional factory being supplied (2021: 993 boe/d, 2020: 707 boe/d). Revenue was further boosted by higher prices due to the strengthening of the Moroccan dirham and the additional factory taking gas at a higher price than the contractual average; offset by
- US$0.4 million lower South Disouq revenue due to lower production (2021: 4,422 boe/d, 2020: 4,825 boe/d) as a result of natural decline at several wells and downtime for workover activity, partly offset by new production from the SD-12X well and a higher realised price for condensate.

- Operating costs increased by US$0.7 million from the prior period due to increased well management costs at South Disouq and a greater number of wells producing in Morocco, partly offset by lower costs at West Gharib due to cost savings and lower workover activities.

- EBITDAX was US$19.9 million, US$4.2 million (27%) higher than EBITDAX of US$15.7 million for the six months to 30 June 2020, for the reasons described in the netback section above.

- The main components of SDX's comprehensive loss of US$10.1 million for the six months ended 30 June 2021 are:

- US$22.1 million Netback explained above;

- US$10.9 million of E&E expense which relates to the US$10.3 million non-cash impairment of the Lalla Mimouna Nord concession in Morocco and ongoing new venture activity (predominantly internal management time);

- US$14.9 million of DD&A expense which reflects lower West Gharib production offset by increased production in Morocco;

- US$2.3 million of ongoing G&A expense; and

- US$3.7 million of corporation tax predominantly for South Disouq.

Operating cash flow (before capex, excluding discontinued operations)

- Operating cash flow (before capex, excluding discontinued operations) of US$14.9 million, 43% higher than the same period in 2020 of US$10.4 million primarily due to the netback drivers discussed above, as well as less cash spent on inventory.

H1 2021 ESG metrics

- The Company's operated assets recorded a carbon intensity of 2.7kg CO2e/boe in H1 2021, which is one of the lowest rates in the industry. This was higher than the 1.7 kg CO2e/boe reported for the twelve months ended 31 December 2020 as the booster compressor at South Disouq was online throughout H1 2021, but only from Q2 2020, and in January 2021 a second production compressor was commissioned in Morocco. Combined production from the two assets was also marginally lower in H1 2021 compared to H1 2020.

- Scope 1 greenhouse gas emissions at operated assets were 4,405 tons of CO2e. Scope 3 greenhouse gas emissions in Morocco were 75,500 tons of CO2e, which is approximately 38,500 tons of CO2e less than using alternative heavy fuel oil.

- There was one Lost Time Injury recorded in Morocco in July 2021. A contractor sustained a minor injury in a road traffic accident but after a short period of observation was able to return to work.

- No produced water was discharged into the environment in Morocco (100% contained and evaporated) or at South Disouq (100% recycled) during H1 2021.

- There were no hydrocarbon spills at operated assets during H1 2021.

- During the first half of 2021, the Company was delighted to support two hospitals close to the South Disouq operation by donating 13 monitors and BPAP ventilators to assist both in alleviating the current COVID-19 crisis and equipping the teams there for the longer-term health of our local communities. In Morocco, the Company is working on several initiatives to be launched later in 2021 as soon as this can be done safely.

- The Company continues to adopt high standards of Governance through its adherence to the QCA Code on Corporate Governance.

Outlook

- Management believes that the Company is well-placed to weather the current macroeconomic uncertainties and continues to screen a number of business development opportunities.

- Cash generation is expected to continue strongly through 2021 and beyond as approximately 85% of the Company's cash flows are expected to be generated from fixed-price gas businesses.

- Whilst acknowledging the volatility of the commodities market, the current strong oil price and outlook means that the Group also plans to capitalise on its recent production service agreement extension at West Gharib by investing in a 12-well development drilling programme over the next three years, including four wells in 2021.

- Anticipated 2021 and 2022 work programmes are fully funded.

- The Company continues to assess the optimum use of capital in the interests of all stakeholders, whether that be investment into new projects or returning cash to shareholders. At present the Company is focussed on continued investment of its portfolio and considers this the most appropriate use of the Company's capital. This will be assessed on an ongoing basis.


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